MACD Technical Analysis Basics
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Questions and Answers

What is the primary formula used to calculate MACD?

  • MACD = EMA(12) + EMA(26)
  • MACD = EMA(12) - EMA(26) (correct)
  • MACD = EMA(9) - EMA(12)
  • MACD = EMA(9) + EMA(26)

What does a positive difference between MACD and its signal line indicate?

  • A buying signal (correct)
  • A neutral movement
  • A selling signal
  • A weakening trend

In the context of MACD, what does a downward crossover of MACD with the signal line represent?

  • Selling signal (correct)
  • Confirmation of a bullish pattern
  • Continuation of an uptrend
  • Potential upward momentum

What is the role of the MACD Histogram?

<p>To indicate the difference between MACD and its signal line (C)</p> Signup and view all the answers

How is the signal line for MACD calculated?

<p>EMA(9) from MACD (A)</p> Signup and view all the answers

What indicates an upward trend according to MACD analysis?

<p>Both MACD and signal line above zero (C)</p> Signup and view all the answers

What configuration of MACD suggests an overbought market condition?

<p>MACD shows dramatic upward movement (C)</p> Signup and view all the answers

What is the implication of both MACD and signal line being below the zero line?

<p>Establishment of a downtrend (C)</p> Signup and view all the answers

What does a dramatic fall in the MACD indicate in terms of market conditions?

<p>Future oversold market with weakening uptrend (D)</p> Signup and view all the answers

Which statement accurately describes a disadvantage of the MACD?

<p>It's a lagging indicator that may fail to predict immediate market movements. (D)</p> Signup and view all the answers

In the context of MACD, what does divergence indicate?

<p>A potential reversal in market trend (B)</p> Signup and view all the answers

What is the primary function of the MACD histogram?

<p>To predict MACD signals and identify divergences (B)</p> Signup and view all the answers

How should MACD be utilized according to the advantages listed?

<p>Without any time frame limitations (C)</p> Signup and view all the answers

What does a positive (bullish) crossover with the zero line indicate?

<p>Potential for bullish momentum to gain strength (A)</p> Signup and view all the answers

What should traders be cautious about when interpreting signals from the MACD histogram?

<p>There is potential for fake signals if the histogram diverges significantly from actual price movement. (C)</p> Signup and view all the answers

Which combination of moving averages can be used with MACD?

<p>Any combination of moving averages is acceptable (B)</p> Signup and view all the answers

Flashcards

MACD

Moving Average Convergence Divergence, a technical analysis indicator used to identify trends and potential trading signals.

MACD Calculation

Calculated by subtracting a 26-period exponential moving average (EMA) from a 12-period EMA.

Signal Line

A 9-period EMA of the MACD line (the difference between two EMAs).

MACD Histogram

Visual representation of the difference between the MACD and its signal line.

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Buying Signal (MACD)

MACD line crosses above the signal line.

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Selling Signal (MACD)

MACD line crosses below the signal line.

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Overbought/Oversold (MACD)

Dramatic movements of the MACD line can indicate potential overbought or oversold conditions.

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Trend Justification

Both MACD and signal lines above/below the zero line suggest an uptrend/downtrend, respectively.

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MACD Crossovers

When the MACD line crosses above the signal line, it's a bullish (positive) signal. When the MACD line crosses below the signal line, it's a bearish (negative) signal.

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MACD Convergence/Divergence

When price makes higher highs, but MACD makes lower highs, it's bearish divergence. When price makes lower lows, but MACD makes higher lows, it's bullish divergence.

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MACD & Trend

MACD above the zero line suggests an uptrend, MACD below the zero line suggests a downtrend.

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MACD Histogram: Slant Divergence

When the MACD Histogram forms higher peaks, but the price makes lower highs, it's a bearish slant divergence.

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MACD Histogram: Peak-Trough Divergence

When the MACD Histogram creates higher peaks/lower troughs, but the price makes lower highs/higher lows, it's a divergence signal.

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MACD Histogram: Advantages

The MACD Histogram anticipates crossovers, provides early signals, and can be used across different time frames.

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MACD Histogram: Disadvantages

The MACD Histogram can produce fake signals, as it is a secondary indicator and not a primary price driver.

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MACD vs. Histogram

MACD measures overall trend, Histogram predicts signal changes. MACD is a primary indicator, Histogram is secondary.

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Study Notes

MACD - Moving Average Convergence/Divergence

  • MACD is Moving Average Convergence Divergence, a technical analysis indicator
  • Developed by G. Appel in the late 1970s
  • A strong tool for identifying divergence in technical analysis
  • Useful for trend identification
  • Short EMA is 1/4 of dominant asset/stock cycle length
  • Long EMA is 1/2 of dominant asset/stock cycle length

Calculation of MACD

  • 3 exponential moving averages are used in calculation
  • MACD = Short EMA - Long EMA
  • Signal line is the 9-day EMA from the MACD
  • The difference between the MACD and signal line is used to indicate trend

MACD Usage

  • Buying/Selling Signals
    • Upward crossover of MACD and signal lines indicates a buy signal
    • Downward crossover indicates a sell signal
  • Overbought/Oversold Markets
    • Dramatic MACD rises indicate an overbought market
    • Dramatic MACD falls indicate an oversold market
  • Trend Justification
    • Both lines above zero line = Up Trend
    • Both lines below zero line = Down Trend
  • Weakening Trends
    • Price creates lower lows, MACD creates higher lows = Weakening downtrend
    • Price creates higher highs, MACD creates lower highs = Weakening uptrend

Crossovers with Moving Averages

  • Positive (bullish) crossover: MACD crosses above the signal line
  • Negative (bearish) crossover: MACD crosses below the signal line

Crossovers with Centerline (Zero) Line

  • Bearish crossover: MACD crosses below the centerline
  • Bullish crossover: MACD crosses above the centerline

Divergence

  • Positive (bullish): Stock price makes a lower low, and MACD makes a higher low
  • Negative (bearish): Stock price makes a higher high, and MACD makes a lower high

Advantages of MACD Histogram

  • Predicts MACD signals using divergences
  • Useful without time frame limitations
  • Assists in determining and detecting primary trend

Disadvantages of MACD Histogram

  • Lagging indicator (can be improved with histogram)
  • Not useful for identifying overbought/oversold levels
  • Calculating as a total difference between moving averages (not percentage) complicates comparison over long periods (especially during exponential movements)

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Related Documents

MACD - Moving Average Convergence/Divergence PDF

Description

Explore the fundamentals of the Moving Average Convergence Divergence (MACD) indicator used in technical analysis. Learn about its calculation, usage for buying and selling signals, and how it helps identify trends in financial markets. This quiz covers the key concepts for understanding MACD's role in trading strategies.

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